Is ACME Mortgage Company's Mandatory Arbitration Clause a Problem for ABC National Bank?

A

The inclusion of a mandatory arbitration clause in mortgage documents is a common practice in the mortgage industry. Such clauses require borrowers to submit any disputes arising from the loan agreement to an arbitration process rather than pursuing litigation in court.

As to whether this clause is a problem for ABC National Bank, the answer depends on several factors. First, it is important to consider whether the clause is legal under state and federal law. In general, arbitration clauses are permitted under federal law, although some states have passed laws restricting their use in certain situations.

Assuming the clause is legal, the next question is whether it is fair and reasonable to borrowers. Some consumer advocates argue that mandatory arbitration clauses are unfair to borrowers because they deprive them of their right to a jury trial and can limit the amount of damages they can recover. However, courts have generally upheld these clauses as long as they are clear and unambiguous and do not waive any substantive rights.

In the context of ABC National Bank's relationship with ACME Mortgage Company, the presence of a mandatory arbitration clause in ACME's mortgage documents alone does not necessarily indicate that ACME is engaging in predatory or abusive lending practices. Therefore, answer A is correct - the clause is not a problem for ABC National unless other predatory or abusive lending practices are evident in the loans sold by ACME.

However, it may still be advisable for ABC National to carefully review ACME's loan portfolio and ensure that the loans it is purchasing are fair and reasonable to borrowers. If ABC National determines that ACME is engaging in abusive lending practices, it may choose to stop purchasing loans from ACME or require ACME to strike the arbitration clause from future loans.